This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

November 3, 2014

An Austrian view on SeaTac's minimum wage increase.

"Minimum wage rates, whether decreed and enforced by the government or by labor union pressure and violence, result in mass unemployment prolonged year after year as soon as they try to raise wage rates above the height of the unhampered market." (Mises, Planning for Freedom, p. 27)

Raising minimum wage has become one of the most familiar and heated debates of our time. Recently, Seattle moved to increase their minimum wage to $15 an hour over the next three to seven years, the highest in the nation. And the SeaTac (Seattle/Tacoma) area has raised their minimum wage to $15 as well, effective immediately. The full effects of the Seattle raise are not yet known, but in an opinion piece for the Washington Post, Dana Milbank points out that "the sky did not fall" after the SeaTac wage hike (source: http://www.washingtonpost.com/opinions/dana-milbank-no-calamity-yet-as-seatac-wash-adjusts-to-15-minimum-wage/2014/09/05/d12ba922-3503-11e4-9e92-0899b306bbea_story.html).

In his piece, Milbank notes several businesses that have added jobs and expanded even after the minimum wage increase. He points to Cedarbrook Lodge, Togo's Sandwiches, and Palace Kitchen as evidence that the minimum wage opposition was crying wolf. Unfortunately, he has overlooked a subtle, but key effect minimum wage: a switch from unskilled to skilled labor that leaves many more workers unemployed.

A simple thought exercise can explain this phenomenon. Imagine Seattle as a high-wage bastion among its lower-wage suburbs. Employers who choose to stay in the city will naturally have to cut back on jobs, and will be much pickier about who they hire. Now, picture a skilled minimum wage worker that lives outside of the city. He or she knows that there are better wages to be had in Seattle, so he starts a new job search. The employer who stays in the city snatches him up, knowing he will get a more productive worker for the money he is paying. In the mean time, an unskilled worker from the city is now out of a job, having been replaced by the skilled (or semi-skilled) worker from the suburbs.

So what happens to this unskilled worker? Well, he moves. He goes into the suburbs and replaces the skilled worker for a lower wage than what Seattle is paying. In essence, there has been a flip-flop of workers. Minimum-wage advocates don't see (or choose to ignore) this effect, and trumpet their efforts as having produced a higher standard of living for those in the city. Obviously, this is completely disregarding a large portion of displaced workers who are now worse off because of the wage increase.

Of course, there are plenty of other arguments against a minimum wage increase which have not been discussed here. Anyone with even a basic economic education can see this happening. Unfortunately, politicians are rarely economists, so we are stuck with feel-good policies that do much more harm than planned, and lead to long-term unemployment for people who otherwise would be employed. Mises explained the detrimental effects of a minimum wage years ago, but clearly his arguments fell on deaf ears. Maybe Seattle's mayor should speak with the unskilled, displaced SeaTac worker to find out how minimum wage increases really work.